Think of it this way: If you have your paycheck deposited into a checking account for paying bills, and sweep all your leftover savings into a retirement fund or an investment account, what will you do when you have an emergency like:
- Your car breaks down and needs a costly repair the same week that you're paying your mortgage and an estimated tax payment.
- Your condo association informs all owners that the cost of repairing the roof of the building after a rash of storms has depleted the condo reserves, and therefore all owners are required to pay a special one-time assessment.
- Your child gets sick and needs an expensive medication, but you just dipped into the cushion in your checking account to pay the previous month's doctor's bill.
A savings account provides the necessary back-up funding for your checking account and give you the peace of mind that you don't need to rely on credit or tap into your investments when the unexpected occurs.
And while its low interest rates means that a savings account is not the go-to investment for future expenses (the "future" being anywhere from next week to five years from now), it is the right place for cash to serve as a safety net for unexpected expenses as well as a temporary parking spot for planned future purchases. That said, keeping your cash accessible doesn't mean settling for zero interest.
Why Compare Savings Accounts
A recent survey by MagnifyMoney.com revealed that 73.4 percent of Americans with savings accounts keep their money in a traditional savings account that currently pays interest rates close to 0 percent, and of those who have a savings account, the average balance comes to $28,696.
By shopping around among bank, credit union and online-only savings accounts, you can find one that will increase the interest you earn, lower your fees and still meet your needs.
Internet-only accounts often pay 0.9 percent or more on savings, according to MagnifyMoney, while bank savings accounts are paying as little as 0.01 percent. Switching from a traditional account to an online savings account means that the average American (with that $28,696 balance) would earn more than $250 a year on their cash stash instead of settling for just $5 a year in interest.
How to Compare Savings Accounts
Websites such as Bankrate.com, SavingsAccount.com, MagnifyMoney.com and MoneyRates.com offer quick rankings to compare various savings accounts rates, but your decision about which savings account to open should be based on more than just interest rates. You should also consider:
- Fees. Some savings accounts charge fees unless you meet minimum balance requirements or have established direct deposit. Any fees will cut into the limited interest you earn.
- Interest compounding. For the maximum interest earnings, make sure interest is compounded daily.
- Overdraft protection. If you're concerned about overspending on your checking account, make sure you can link the savings account to provide overdraft protection.
- Account set-up. If you're interested in saving for a variety of specific goals, such as a vacation or a down payment on a house, you may want to look for an account that allows you to set up sub-accounts so you can more easily track your savings.
- Availability of funds. Find out how quickly any deposits are credited and how long it will take to transfer from one account to another. Accounts within the same bank usually allow instantaneous transfers, but some online-only savings accounts can take a day or so to complete a transfer.
- Check on Federal Deposit Insurance Corp. insurance. While most savings accounts are FDIC-insured, take a moment to double-check on the insurance so that you don't risk losing your money. One of the main benefits of a savings account is the lack of risk.
- Check the rules on withdrawals. Most savings accounts and money market accounts limit their customers to six withdrawals per month. Find out what happens if you make too many withdrawals.
Michele Lerner is a Motley Fool contributing writer.